A roaring stock market and rising interest rates are fuelling the strongest recovery in the $2.4 trillion US corporate-pension sector in more than a quarter century, giving companies new flexibility in dealing with some employee-benefit costs.

Investments in the average company's pension plan are expected to be at levels that cover 96% of future obligations at the end of the year, according to a new estimate by JP Morgan Chase. A separate analysis by Milliman Inc, which provides actuarial products and services, puts the figure above 94%, while pension specialist Mercer says the figure was 91% at the end of October. Funding levels are up from 77% at the end of last year, according to JP Morgan—a figure that was essentially unchanged since the financial crisis of 2008.

The news for pension plans could get better in 2014. If yields on bonds continue to rise, as many expect when the Federal Reserve eventually reduces its bond buying, the health of corporate pensions could be further bolstered. Funding levels are partly determined by interest rates on corporate bonds, which are used to value future retirement obligations.

Rising stocks are the most important reason pensions are recovering. That aid may not last if the market slips from its current record level, of course. Such volatility in returns and funding levels is a big reason companies are looking for an opportunity to freeze pension plans and move the risk off their books. Until 2008, corporate funds were generally funded at more than 90% of their obligations, and they reached as high as 130% of obligations in 1999. But recent low interest rates and stock-market troubles from the financial crisis have been a challenge.

The improvement in funding comes as fewer companies offer traditional pensions in favour of 401(k) programs. There were 45,258 so-called defined-benefit plans—those that provide traditional pensions—offered in 2011, the latest year data are available from the US Department of Labor, down from 46,859 a decade earlier.

The return to health of some pension plans is giving companies new options. Some are gaining financial flexibility because they now don't have to spend extra cash on pension contributions. Others may consider shifting their obligations to insurance companies. These deals, which generally take place when a company's plan is close to fully funded status, provide employees with the same retirement benefits from a different provider. The companies shift future liabilities to insurers, which in turn provide employees with annuities.

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"We've lost federal protections and guarantees," said Bill Jones, a retired worker at New York Telephone Co, which later became part of Verizon. Jones is among the workers whose pension benefits now are provided by Prudential.

A Verizon spokesman said Prudential is a "highly rated and strong company that is well funded to meet these obligations", adding that there are state guarantee associations in place to back up the workers' annuities.

Some companies may elect to hand employees lump-sum payments, moves that are subject to worker approval. For example, Ford Motor Co offered voluntary lump-sum payments to employees last year.

Pension decisions such as these are "on the radar screen of every person working on pension funds", now that the plans are on firmer ground, says Karin Franceries, head of US strategy at JP Morgan Asset Management, who works with corporate plans.

Healthier pension funds may not have an immediate impact on employees but should give current and future beneficiaries greater certainty about pension payments to come.

If more companies, however, consider offering employees lump-sum payments in lieu of future pension payments, future investment decisions related to employees' retirement cash would be on their shoulders.

The narrowing of the corporate retirement funding gap over the past year is the most dramatic since 1986. The $2.9 trillion public pension sector also is recovering, though analysts say those plans aren't as healthy as corporate plans.

Stock-market gains account for about 60% of the improvement in pension funding status, according to an analysis by JP Morgan of 1,200 companies. The rest has come from rising interest rates, which effectively reduce the value of future benefit payments to retirees.

"The wind is at everybody's back," says Jack Ciesielski of the Analyst's Accounting Observer, referring to strong stock prices and higher bond yields. "It's the best of all worlds."

Pension funding details are disclosed at the end of each fiscal year, so most companies will share data in February, when many annual report are released. But analysts says both large and small companies likely will be helped this year. The pension plan of energy company Entergy Corp was just 63% funded at the end of last year, for example. The company had about 64% of its plans in stock investments this year.

As a result of the rise is stocks, Entergy's plan now is more than 70% funded, according to estimates from specialists.

The fund that may have been helped more than any other this year: the plan operated by Johnson & Johnson, which was just 80% funded at the beginning of the year. The pharmaceutical giant had 75% of its plan in stocks at that time, however—the largest stock allocation in Milliman's study of 100 large companies. A Johnson & Johnson spokesman wouldn't comment.

The Omaha, Nebraska company had assets covering just 74% of the pension's obligations at the end of 2012, according to figures compiled by Milliman.

But the plan had a 72% allocation to stocks—the second-largest in the universe of companies tracked by Milliman, meaning it is likely returning to better health.

A Berkshire representative didn't respond to requests for comment.

Corporate plans would have done even better if they had more money in stocks. The average allocation to stocks is just 52%, down from 60% in 2007, before the financial crisis, according to the most recent estimates from JP Morgan. About 25% of corporate pensions now are overfunded, or have more investments than future obligations, JP Morgan estimates.

Public pension plans also are seeing a recovery, though not at the same rate as corporate pension plans, and many remained troubled.

Illinois is trying to repair its broken state public employee retirement system. Detroit has been given the green light by a bankruptcy judge to reduce its own pension benefits.

Other plans are holding up better, however. Public plans are currently 76% funded, up from 66% at the end of last year, JP Morgan estimates. Public pension funds tend to smooth their returns over a period of five years, which means that, for accounting and reporting purposes, the gains will be phased in over time.

Pension specialist Mercer recently held a webcast to help corporate clients decide on strategies to take advantage of funds that have become more flush.

"With significant improvement in funded status over the past year for most US pension plans, many plan sponsors are now in a position to execute on risk transfer strategies that may not have been previously feasible," Mercer told its clients.